The Xero Limited (ASX: XRO) share price has dropped substantially since 2021. Does the much lower share price make it a buy?
Xero is one of the biggest ASX tech shares. It offers accounting technology for small and medium sized businesses around the world. The software offering also includes things like payroll, invoicing and so on.
What has happened to the Xero share price?
Xero has sunk close to 50% since November 2021. There aren’t too many ASX 200 (ASX: XJO) shares that have fallen harder than that.
The tricky thing for Xero is that it was valued very highly during 2021 and 2022. When inflation and interest rates shot higher, it led to safer assets looking more attractive and the ‘risky’ ones, like Xero, being sold off.
But, I think it would be a mistake to think of Xero as a low-profit, no-hope ASX tech share.
I believe that companies should choose what would creates the most value for shareholders over the long-term, not just the next few months.
Xero is increasingly spending many millions of dollars on growing the business through marketing, while also increasing its product design and development budget.
For example, in the FY23 half-year report, it noted a $63.9 million increase in product design and development as it invests globally in its software and platform. That’s one of the main reasons why it still made a net loss after tax of NZ$16 million in HY23, though free cash flow did surge by 145% to NZ$15.5 million.
Why investors should pay attention
This tech company isn’t making big profits yet. But I think it will later this decade. It doesn’t need to make big profits now. For starters, it’s saving on income taxes by not making large profits.
But, there are numerous factors that tell me Xero should do well over the next decade.
It has an incredibly high customer loyalty rate. Average revenue per user (ARPU) is compounding at a strong rate (up 13% in HY23). Operating revenue continues to grow strongly. The gross profit margin of 87% is incredibly high.
The business is still growing, despite all of the worries about the global economy. With the Xero share price down so much, investors can now buy shares at half the price of what it was before.
If it can keep growing its ARPU and global subscriber base, the future looks bright and I’d call Xero shares a buy.
